For many aspiring real estate investors, it’s an exciting day when they discover hard money loans. Finding a funding option that’s nowhere near as complicated as a traditional bank lending process opens up possibilities for investors of all types.
However, if you’re new to the idea, you’re likely wondering how does a hard money loan work? The good news is it’s relatively simple. With some understanding and preparation, you could be funded faster than you think.
What Is A Hard Money Loan?
Hard money loans are popular funding sources for real estate investors, but what is a hard money loan? They’re appealing to investors with fair credit, as many hard money lenders don’t factor credit scores into their lending decisions as heavily as traditional bankers. Hard money loans tend to close faster than traditional mortgages because the loan is secured against the property value (LTV) the investor is purchasing. The underwriting process isn’t as intensive as a conventional mortgage.
Is A Hard Money Loan A Good Idea?
The answer to this depends on your specific circumstances. Before applying, it’s crucial to understand how a hard money loan works while asking yourself the following questions:
Do I Have A Solid Plan For My Exit Strategy?
There’s no way to guarantee the future, but does your prospective investment property have good cash flow potential? If you’re using your hard money loan as a bridge loan, do you have contractors and realtors in place to flip your property with plenty of time to meet the terms of your loan?
Can I Afford The Higher Interest Rates?
Hard money comes at a higher rate because of its relative convenience. Speak with your potential lenders about their rates, and only take out a loan if you’re confident you can afford it.
Have I Done My Due Diligence On My Investment Property?
Even if your exit strategy delivers good numbers to you and your lender, the best-laid plans can fall apart with incomplete due diligence. Ensure that your building is zoned for your intended use, find out what permits you’ll need, and consult a lawyer to ensure you’re not missing any unforeseen obstacles that could derail an otherwise excellent real
Hard Money Loan Uses
As mentioned above, a hard money loan works best for real estate investments, but every lender will have different criteria for what projects they fund. At HouseMax Funding, we specialize in funding:
- Fix and flip loans
- Rental property loans
- Renovation loans
- New construction loans
- Multi-family housing loans
- Commercial loans
Hard Money Loan Requirements
As a lender, the most significant consideration regarding how a hard money loan works for both parties is the numbers. At HouseMax Funding, we look at the following criteria when considering whether to approve you for a hard money loan application:
- How much does the property cost?
- What is your exit strategy, and do the numbers work? (Looking at ARV, cash-flow projections, etc.)
- Do you have a down payment (we’re generally looking for 20%, so we see you have skin in the game)?
- Do you have an LLC?
In some cases, we may consider your credit score. Every project is different, so it never hurts to talk with a hard money lender before the application process to get an idea of what to expect for your
How Long Does A Hard Money Loan Take?
Closing time differs for every lender, but you can expect a fast close with a hard money lender. We generally close within ten days at our hard money lending office in Texas.
Getting Approved For A Hard Money Loan
Aside from meeting the previously stated requirements, taking extra steps to stack approval odds in your favor always helps, especially in a tricky market. Here are a few tips.
Have Your Financial Statements In Order
The more organized you are, the quicker you can respond to a hard money lender’s requests for documentation and information during the underwriting process.
Increase Your Credit Score
Even though credit scores aren’t the primary consideration when approving a loan, the higher your credit score, the higher the
Networking with lenders, contractors, real estate agents, and fellow investors helps everything go well when you find an opportunity you want to move on. Relationships take time to build, so the best time to reach out to a hard money lender, attend a real estate meetup, or call a friend who’s already invested is now.
Getting Started With A Hard Money Lender
At HouseMax Funding, we know the magic that happens when an investor that understands how a hard money loan works finds an ideal investment opportunity. Whether you want to find out what you need to do to get your business in order or are ready to apply for a hard money loan, we want to talk to you. Take the first step and
contact us today.